First question, then, are cryptocurrencies currencies or commodities?
Gary Sheynkman: A currency is supposed to be legal tender, but we still talk about the value of cryptos in dirhams or dollars or whatever. Sooner rather than later, we will get to stable coins that have currency baskets and that will provide some stability – and in the future we’ll have a more unified view of value.
Arabian Escapes accepts payment in Bitcoin, Michael. You must think that it is a unit of exchange?
Michael Burke: Well, yes and no. I look at Bitcoin as a unit of value; a mechanism to transfer value from one place to another. I also agree with ADGM [Abu Dhabi Global Market], DIFC [Dubai International Financial Centre] and DMCC [Dubai Multi Commodities Centre] who all classify Bitcoin as a commodity.
Their main hesitation is that they don’t have the support of the local banks who are cautious and also afraid from an anti-money laundering perspective. That’s the biggest drawback holding back the UAE from being able to be a hub like Zurich, Malta or Gibraltar. But the biggest issue for me is that you won’t have ease of liquidity until you have more banks on-board. It’s like trying to trade with a sanctioned country.
Where do we need to get to in order for people to do day-to-day transactions? Or is that already off the table in terms of where the crypto industry is going?
GS: I don’t know if we really need it.
I firmly believe that the underlying technology, like all good technology that becomes a part of our lives, will eventually become invisible. Countries will manage their currencies by operating private blockchains and when they need to issue they will have a protocol for editing their blockchain. And that’s because it’s just a better widget than the decades-old technology that we currently use in our financial systems.
So the utopian idea of cryptocurrencies as existing outside of central banks is already dead?
GS: Absolutely. I’ll give you an example: in January, Coinbase sent a letter to its users to say that anyone holding more than $20,000 had their information passed on to the IRS in the US. This is an immutable ledger of every transaction you’ve ever done!
So this idea of going around the legal tender system is just not real. You can reduce business friction, but the idea that there’s going to be a new banking system outside of the control of major banks and governments is just naive.
MB: I also think that in the next 10 or 15 years all central banks will issue their own blockchain-backed currency. One might ask the question: why don’t they do this now? And the reason is that banks still rely on other banks. They can’t just start issuing their own cryptocurrency overnight because it will have such a detrimental effect on the fees that regular banks charge. So it could be years before they’re forced to embrace this technology – but it will happen.
But if I lived in a volatile economy, I think I would want to convert my salary into cryptocurrency as a means of transferring it to something that has an international standard and will hold its value.
MB: In sub-Saharan Africa, banking is all done on phones, so the competition is from telcos rather than the banking system. If those telcos were to issue their own tokens as a unit of value pegged to a currency they would have a very disruptive effect on the local currencies in those countries.
GS: It goes back to what I was saying about good technology becoming invisible. You might currently buy phone credits on a scratch card. What if that was now blockchain-based and those telcos had a much better widget to power their service?
MB: Could you use those minutes to buy dinner or pay for your kid’s tuition?
GS: Absolutely. I think that will happen in parts of the world where they don’t have a stable currency. You’ll have a telco-owned loyalty token of some sort.
When Ripple came out it was dismissed by crypto purists as being centrally controlled, but it now looks like its token has a good user case. Is this where blockchain needs to get to?
GS: From a governance perspective you don’t want such centralised control. But Ripple operates two separate products: it has an amazing product for banks, that has nothing to do with tokens, and it has a product for exchanges.
We have one here – UAE Exchange – that allows cheaper cross-border payments and is great for customers.
For people creating their own blockchains as a means of processing payments, what will be the incentive structure for the decentralised computers that need to verify those transactions?
GS: I think we’ll end up with a few global blockchains; you won’t see small companies trying to do it themselves. They’ll have a private blockchain that uses a public one as a backup. It’s called tethering and it’s your immutable proof of a transaction.
MB: You’re talking about the groups of miners and servers that enable transactions to happen?
GS: Yes, and the magic thing with blockchain is consensus. For the first time in human history we can independently verify events with very little probability of it being tampered with. And with that consensus comes a lot of interesting possibilities.
You no longer need an external audit, which is why the big consulting firms are very quickly trying to become system integration software companies that input blockchain processes for their clients and get a monthly fee to support those systems, as opposed to being paid a retainer to audit logs.
You’ve got cryptos, which are the shop window tokens; you have the underlying blockchain process on which they’re built; and then you’ve got the general field of tokenisation of regular assets in the financial markets. Can you explain how these different layers interact?
GS: You can securitise anything with a token. You can buy a house, sell it to a company and then sell the shares of that company. But it’s very difficult to sell a share as you need to go through the process of explaining what it is and the whole documentation process. But if it’s a token that represents the share, you can just do it over your phone. It releases the liquidity in physical assets.
MB: It comes down to how you want to use the technology. Let’s say Dubai Land Department records all transactions on blockchain and you can link all of the information and history of a property. Or are you going to use the technology to actually issue a token to sell it? At Arabian Escapes, we just want to offer clients the opportunity to pay in cryptos and we’ll convert it.
How many people are doing that?
MB: We’ve had one person rent a property and one person buy a property. I don’t see a huge demand – most people holding cryptocurrencies believe it’s undervalued and I don’t see them diversifying until Bitcoin is around $12-16,000.
Will that happen? It has been on a steady downhill path for most of 2018...
MB: Eventually, I think it will. The market’s going through a maturation phase and the key issue now is liquidity. You need more banks to accept payments to and from exchanges. And in order for that to happen you need to have proper due diligence procedures so that banks feel comfortable in this space.
GS: I’m bullish. The vast majority of value exchange right now is done directly between professionals and not on exchanges. And then you need to look at the high frequency trading firms in New York or Chicago that own their own fibre optical infrastructure, and who can buy satellite bandwidth to do really complex things to expedite and make trades and make settlements much quicker.
That is coming to crypto now and it’s not coming from the technology community, it’s coming from the banking community. They are getting their licences in place, they are investing into data centres, they’re figuring out where to domicile these new entities.
When that shoe drops, the volume of total crypto being exchanged is going to multiply dramatically. Is that going to juice the price or is it going to tank?
I don’t know. I’m not going to make that prediction but the total velocity is going to increase really dramatically.
Okay, but in a sense that’s still talking about crypto as an asset...
GS: Bitcoin has a finite supply much like a precious metal. It has a use case of being an effective mechanism of confirmed transactions, which has some intrinsic value. It’s much more portable than a precious metal, it’s much more divisible. So maybe the major banks will decide that it’s okay to hold Bitcoin and Ethereum in reserve. I think that will happen at some point in time, whether organically or by government action.
Hotmail founder Sabeer Bhatia says ICOs are essentially fraudulent because they are based on ideas that don’t exist?
GS: There have been ICOs from last year that raised a lot of money and are doing great. The vast majority of them screwed up. A bunch of them were charlatans. Some of them weren’t experienced and by virtue of negligence broke securities laws. You should never invest into anything when you haven’t done the research. It’s just basic due diligence.
This is a new way of fundraising where you’re not giving anything away of your company. How does that work?
MB: It comes down to the fine print. Is it a securitised or non-securitised token? What’s written in the white paper? The key is to demystify the word ICO. It’s a way to invest in a business idea outside of the normal banking system.
What’s the relationship between the token and the activity of the company?
GS: It’s very important to differentiate between utility and security tokens. You can issue a security token where you securitise the debt the way any bank does.
A utility token works in much the same way that a crypto functions where you need the actual token for the machine to work. So for example, if you’re a bank and Michael here is an airline and you have a smart contract to adjust for exchanges between your two loyalty programmes when you do your monthly reconciliation, the smart contracts that govern that process need computing power to do that.
And so you pay for that processing power with the token. And the more use case there is for the system the more widely adopted it is. And if there’s a lot of network congestion in a public protocol then the value goes up in what you need to pay to get that process.
There’s also a major speculative side to it because it’s an asset and, in an ideal world, tokens like Stellar and Ethereum are more stable because they create predictable businesses.
It’s a process and you have to realise that a lot of the more interesting businesses forming around blockchain are like companies like in the early 90s that were building databases. People would say: “you’re building an open-source database and implementing it for big companies that will eventually need it – that’s not a business!” Turns out that was actually a great business.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.